ISSUE VI : PPPS in infrastructure in India – Overview

PPPs in Infrastructure in India – Overview

Introduction

Basic infrastructure in India has developed disproportionate to the requirements of industry and population. With the government aiming for 9 to 10% annualized growth in GDP, infrastructure has to be created for facilitating the same, and the lack thereof is a serious impediment to the envisaged growth. According to the Planning Commission about 8% of GDP needs to be invested in infrastructure development annually to fulfill the infrastructure requirements of the country. Development of infrastructure needs huge investment which has till date been met by the public sector alone, without the help of private sector participation. With the outlook of the government changing in regard to creation of infrastructure, the opportunities for private players in infrastructure projects are humongous. This has further been made viable with the government working towards creating an enabling environment for the implementation of infrastructure projects through Public Private Partnerships (“PPPs”). PPPs are increasingly becoming the preferred mode for private participation in infrastructure especially in sectors such as highways, airports, ports, railways and urban transit systems.

In this Bulletin we are going to discuss the scope of PPPs in Infrastructure in India and the initiatives taken by the Government of India (“GOI”), state governments and Reserve Bank of India (“RBI”) to sustain the development by giving opportunity to the private investors in various sectors.

1. Scope of PPPs Infrastructure in India

PPPs have proven to be enormously successful in UK, Australia, EU, etc, for the development of infrastructure and other facilities for public use. Main motive of the government is to maximize the role of the private sector in the development of infrastructure through PPPs projects. Scope of PPPs in India is enormous as it enables the private sector to make reasonable returns on investments and also to act as an instrument for the overall development of the country. PPP projects are generally executed through long-term concession agreements1, ranging from 5 to 50 years, between the government agency and the private investor. The agreement seeks to specify outputs in regard to quality of service and quantifiable performance standards that have a direct bearing on the public, who are the users of such projects. Concessions are primarily awarded in two types of contractual arrangements (i) Franchise – where either the private sector or the public sector creates the infrastructure and then the other operates it for the period of the concession and shares royalty or pays fees for such usage and (ii) Build-Operate-Transfer (BOT) – Contracts where the private investor undertakes to build and operate the project for a fixed period of time and then the ownership reverts to the public sector. These agreements empower the private investor to use public resources to create infrastructure upon which the investors can

levy and collect user charges for the public assets so created from the general users of such services. The Government monitors the delivery of services by adopting a well defined institutional structure that oversees effective contract performance.

2. PPPs projects – Process

GOI recently has issued draft guidelines2 for better implementation of PPPs projects and the following are the important steps to be noted by the private investor before investing in PPPs projects.

a) Bidding Process

There are two basic bidding processes adopted by government agencies for PPP projects: (i) Single Stage Bidding – where the project size is small (below a certain criterion) where the financial proposal is the primary criteria of decision making or (ii) Two Stage Bidding – in case of resource intensive projects. In this the government agency first shortlists the participants on the basis of responses received to the Request for Qualification document and then finalize the award based on the financial proposal in response to the Request for Proposal. The second bidding process is an interactive process where the government agency interfaces with the bidders through pre-bid meetings to clarify the queries of bidders and is bound by the responses issued by them to the various bidders in the course of such meetings apart from the terms of the agreement entered into with the private investor.

b)  Award of Concession

After evaluation and approval of the bid, Letter of Award (“LOA”) is issued by the government agency in favour of the successful bidder. To oversee the implementation of the project an Independent Consultant can be appointed as per the terms of the Concession Agreement. LOA and the Concession Agreement generally contain all the conditions to be fulfilled by the investor prior to award of concession for implementation of the project.

Role of the private sector in PPPs is the construction and management of the operations for the project for the concession period and also to fulfill the investment requirements of the project. The government agency’s contribution is generally by way of fixed assets, whether it is land, buildings or facilities. It may also provide assurances and guarantees required by the private sector partner to raise funds and to ensure smooth construction and operation so that the targeted project is completed in time for the accessibility of the users.

c) Handing over the project back to GOI

At the end of the Concession Agreement, the project, in sound condition, is to be transferred back to the government agency. For the purpose of transfer, the project will consist of the assets of the project and related facilities.

3. Role of RBI

By a circular issued in 1998, banks were prevented from financing promoter’s contribution for projects undertaken by them. However, an exception was made with respect to existing companies providing infrastructure facilities with satisfactory net worth, with a cap of 50% of the promoter’s stake in the company itself. In 2003, RBI created further leeway for banks financing infrastructure projects by permitting practices generally barred.3 Banks were permitted to undertake Inter-Institutional Guarantees, Financing promoters equity and take-out financing. Take-out financing is a method attracted by private investors for seeking financial help for long term projects, by providing medium term loans for, say 5- 7 years, with an understanding that another Financial Institution, like the Infrastructure Development Finance Company, would then take over the loan at a given point of time in the future prior to the end of term. This increases the liquidity and thereby encourages the banks to lend more money to infrastructure projects. Inter-Institutional Guarantees, which were otherwise prohibited, were also allowed, enabling banks to issue guarantees favouring other lending institutions in respect of infrastructure projects, provided the bank takes up 5% of the total project cost.

4. Initiatives taken by the Government

GOI and state governments have taken several initiatives to develop infrastructure in our country. It has formulated policy and issued guidelines from time to time to encourage private sector participation in PPPs.4 GOI and state governments have formed several committees and sub-committees and also brought about relevant policies and schemes to attract private sector participation in PPPs projects. Some of the committees and schemes are given below

4.1. Central Government Initiatives

  1. Cabinet Committee on Infrastructure (“CCI”)

Main objectives of this committee are to initiate policies identify and implement infrastructure projects and ensure project development in a time bound manner. The committee closely monitors the progress of each project approved by it. This Committee approves and reviews policies and projects across infrastructure sectors. It considers and decides financial, institutional and legal measures required to enhance investment in the infrastructure sectors. CCI also assesses the need for financial assistance vide Viability Gap Funding for PPPs projects.

4.1.2 Viability Gap Funding (“VGF”)

Some PPPs projects might not attract private sector participation because of the low to nil returns on investment for the projects. Such projects are offered grants based on the total cost of the project. VGF is a scheme which provides financial support in the form of

grant, one time or in installments, to PPPs projects to make them more viable. This scheme is administered by Ministry of Finance, GOI. Cabinet Committee of Economic Affairs decided to constitute and Empowered Committee and Empowered Institution for approving financial assistance to PPPs projects. Empowered Committee sanctions VGF fund up to INR 200 Crore and any amount exceeding the limit will be sanctioned by the Empowered Committee with the approval of Finance Minister. This Committee also provides instructions relating to eligibility of the project. Empowered Institution is another division formed by Cabinet Committee and it sanctions VGF up to INR 100 Crore. The sectors eligible under this scheme are Road, Railways, Airports, Power Projects in Special Economic Zones etc. Sectors may be added and removed subject to approval of Finance Minister of India.

1.1.3. India Infrastructure Finance Company Ltd (“IIFCL”)

To extend access of roads, safe drinking water, electricity, sanitation, and other basic amenities to the people in India, IIFCL was established by the GOI as a Special Purpose Vehicle in January 2006 and started its Operations from April 2006. The purpose is to provide long term loans to infrastructure projects with high gestation periods. The IIFCL provides assistance of up to 20% of the project costs.5 Even though this assistance is given to public and private sector companies, and PPP’s, overriding priority is given to PPP’s implemented by private sector companies selected through a transparent and competitive bidding process.6

4.2 State Wise Incentives

Each and every state in the country has its own policies on infrastructure. The projects undertaken vary as per the resources available to the particular state government. Here are some of the main incentives given by State of Tamil Nadu and Andhra Pradesh to the private sector companies participating in PPPs projects.

State of Tamil Nadu – State of Tamil Nadu, since the year 2006 till 2010 has approved PPPs projects with a cost of INR 18796.48 Crores in highways and has approved a sum of INR 1407 Crore in ports. This figure shows the amount invested in PPPs projects in the state and there are several projects in the pipeline in the state. Opportunities for the private investors are wide open in PPPs projects in State of Tamil Nadu. One of the attractive incentives given by the state is with regard to the applicable taxes on infrastructure projects. Approved infrastructure projects are eligible for 100% exemption from entry tax, tax on works contract and input taxes from the date of notifying it as an approved infrastructure project till the project is commissioned. Additionally, to make it easier upon new entrants, single window clearance would be available for all infrastructure projects. As per the Government order issued on September 9, 2009, the minimum and maximum rates of tax as specified under Rule 4 of the Tamil Nadu Town and Country Planning (Levy of

Infrastructure and Amenities Charge) Rules, 20087 was to be done away with, and the revised rates were issued. The revised rates are one of the most attractive in the country.

State of Andhra Pradesh – Andhra Pradesh has approved a sum of INR 11071.37 Crore PPPs projects in highways since 2007 till August 2011 and in the ports sector the State has approved a sum of INR 1075.93 Crore on PPPs projects and a lot of new projects await approval for the want of private investors. A new department has been created by the state “Infrastructure and Investment Department” to expedite clearances on project related issues. An attractive incentive given by the state are the concessional rates for allotment of land with lease periods of 33 years and if the project investment is more than INR 100 Crores then for the period in excess of 33 years, the lease rent will be 10% of the market value of the land to be reviewed every five years. Private companies undertaking investment in infrastructure are given 100% reimbursement of stamp duty and transfer fee on purchase or lease of land meant for the project and tax reimbursements of 25% for first five years and other attractive incentives to get involved in PPPs projects.

Conclusion

GOI and state governments welcome and encourage increasing private sector participation in PPPs projects. This is a good step towards the overall development of infrastructure in India. Infrastructure is the back bone of a country’s development, and the Government alone cannot achieve it unless and until private sector companies come forward to assist the Government in the country’s development. Various initiatives discussed here not only give an opportunity to the private investors to expand their business but also participate in the lucrative infrastructure sector vide PPPs projects. The Eleventh Five Year Plan aims at increasing investment in infrastructure from about 5% to 9% of the total GDP. This effectively means that investment in infrastructure has to increase to Rs.20,56,150 Crores (US$ 514 billion) from the current Five Year Plan figure of Rs.8,71,445 Crores (US$ 217 billion) which was the recorded investment for the plan period.8 The Eleventh Year Plan estimates that over 30%9 of the investment in infrastructure would have to be made through private sector participation and PPPs projects, seeking to increase the private sector participation by over three fold from the earlier available data. Initiatives like PPPs have made investment in infrastructure very viable and lucrative for private sector companies. With investment in infrastructure being recorded at 7.5% of the GDP in 2008-09,10 the envisaged goal of 9% by 2011-12 does not seem very unlikely.

Authored by:
S. Aravindan


1 As per the Guidelines for Monitoring PPP Projects given by GOI
2 Draft guidelines for developing PPPs given by GOI
3 As per RBI’s notification DBOD.No BP.BC.67/21.04.048/2002- 2003
4 Draft guidelines for developing PPPs given by GOI dated October 15, 2011
5 As per the article published by Secretariat for Infrastructure, GOI pg.13
6 As per IIFCL scheme of GOI pg 6
7 See G.O.M.S. 161 of 2009 date 09.09.2009
8 As per the article published by GOI on investment in infrastructure
9 As per projections of investment in infrastructure dated 14.08.2008
10 As per the report dated 20.0.2008 of Economic Advisory to the Prime Minister of India

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